RISK VS REWARD - · PDF fileRISK VS REWARD Insightful strategies from a World Cup Trading...
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RISK VS REWARD Insightful strategies from a World Cup Trading Champion Andrea Unger
Transcript of RISK VS REWARD - · PDF fileRISK VS REWARD Insightful strategies from a World Cup Trading...
RISK VS REWARD Insightful strategies from a World Cup Trading Champion
Andrea Unger
A B O U T M E
! Andrea Unger
! *1966
! Master of Science degree in Mechanical Engineering - 1990
! Employed from 1992 to 2001 in technical/commercial
! Positions at multinational companies
! Full time trader since 2001
1 S T P L A C E 6 1 % European TopTraderCup
2005
1ST PLACE 672%, 115%, 240% World Cup Championship of Futures & Forex Trading®
2008 - 2010
F I R S T I TA L I A N B O O K O N M O N E Y M A N A G E M E N T
S O M E S U C C E S S S T O R I E S
S O M E S U C C E S S S T O R I E S
S O M E S U C C E S S S T O R I E S
S O M E S U C C E S S S T O R I E S
S O M E S U C C E S S S T O R I E S
S O M E S U C C E S S S T O R I E S
S O M E S U C C E S S S T O R I E S
VA R I O U S T Y P E S O F R I S K
H O W D O E S I T W O R K ?
M A R T I N G A L E
To increase units after a loss and to decrease after a Loss
A N T I M A R T I N G A L E
To decrease after a loss and to increase after a win
H O W D O E S I T W O R K ?
M A R T I N G A L E
A psychological aspect of thinking that a trader should double their losses after each
losing trade in order to return the trader to a profitable state. This is the false belief that
after a losing streak the probability of having a winning trade increases, and vice versa.
In reality, every event has the same probability!
H O W D O E S I T W O R K ?
A N T I M A R T I N G A L E
This method tries to take advantage of winning periods and protects the capital during
losing periods. An easy approach to this is to use a constant percentage of risk.
For example:
A 2% risk of capital is equivalent to increasing exposure after a win and reducing it after a
loss (after a win the capital increases and so does the 2%. Likewise, when the capital
decreases, so does the 2%).
M A R T I N G A L E E X A M P L E
Martingale would make sense only in cases of infite capital, but since this isn’t possible, why waste our time with it?...
$$$$$$$$$$$$$$$
$ $ $
$ $ $ $ $ $ $ $ $ $ $ $
No money left
} } } first bet
second bet
third bet fourth bet
T H E P O W E R O F P O S I T I O N S I Z I N G
To use the AntiMartingale approach, the most typical method is to fix the percentage of
risk per trade and then size the position accordingly.
Does this approach produce consistent results in any case?
THE POWER OF POSITION SIZING – Strategy 1
THE POWER OF POSITION SIZING – Strategy 1
Basic Strategy with fixed 100.000 lots
Position Sizing applied with 1% risk per trade
Final profits become 4 times greater
THE POWER OF POSITION SIZING – Strategy 2
THE POWER OF POSITION SIZING – Strategy 2 Basic Strategy with fixed
100.000 lots
Position Sizing applied with 1% risk per trade
Here as well, final profits become more than 4 times greater
THE POWER OF POSITION SIZING – Strategy 3
THE POWER OF POSITION SIZING – Strategy 3
Basic Strategy with fixed 100.000 lots
Position Sizing applied with 1% risk per trade
What happened? Final profits are 10 times LOWER?
THE POWER OF POSITION SIZING – Strategy 4
The low number of trades from the previous strategy may have compromised the leverage effect. Let’s now analyse a strategy with many trades
THE POWER OF POSITION SIZING – Strategy 4
Basic Strategy with fixed 100.000 lots
Position Sizing applied with 1% risk per trade
It doesn‘t work, final profits are still lower then the original...
T H E P O W E R O F P O S I T I O N S I Z I N G
A simple fixed percentage risk on every trade leads to completely different scenarios depending on the strategies
Length of positions and the maximum losing position have a strong impact on the final result
A valid alternative would be to adjust the positions size based so far on the maximum losing trade, on the worst day scenario
Doing it this way, we base our exposure on the maximum percentage of loss our equity could have on any given day
T H E P O W E R O F P O S I T I O N S I Z I N G
Diminishing Risk from 2% to 1.5% and putting it all together:
Strategy 3
Strategy 2
Strategy 4
Strategy 1
THE POWER OF POSITION SIZING – Strategy 1
THE POWER OF POSITION SIZING – Strategy 2
THE POWER OF POSITION SIZING – Strategy 3
THE POWER OF POSITION SIZING – Strategy 4
THE POWER OF POSITION SIZING – Portfolio of 4 strategies
C O N C L U S I O N S
Final shape of leverage Equity curve changes depending on various parameters: - Stop Loss - length of trade - Number of trades - Maximum loss
Single lot Strategies may lead to similar results, but once Position Sizing is applied the scenario may change dramatically
To properly “mix” risk and reward, it is a good idea to focus on the expected loss per period rather than a single trade loss, this leads to a better equity line development
Once all this is put together, the cooperation effect leads to skyrocketing profits
C O N C L U S I O N S
Higher % of risk on each trade Lower % of risk on each trade
Higher Return
Faster Return
High drawdown
Risk of ruin
Soft growth
Steady income
Slower returns
Lower equity increase
T A R G E T
the purple forex company
www.axiory.com
